What manufactured housing veteran doesn’t recall HUD Code home manufacturers routinely ‘fluffing’ new home invoices to maximize profitability and cover MHRetailer rebates, as well as buying – down capital borrowing rates to sell more homes? AND subsequent to the brief REIT wave of the mid – 1990s; how, many landlease (nee manufactured home) community owners aggressively raised rental homesite rates, to the point of sucking value right out of the very properties in which our homeowners/site lessees lived.*1 Yes, those were indeed go – go days, and still are in a few local housing markets; when & where the GOLD RULE prevailed, AND continues!

Well, as an industry and realty asset class, we’ve known for awhile we should (i.e. ‘have to’) change the way we do business with our traditional ‘newly weds and nearly deads’ housing market, or we’ll lose them forever, if we haven’t already done so. Site – built housing finance abuses (e.g. no money down ARM deals put pregnant teenagers into $80,000.00 tract houses throughout the Midwest and elsewhere, until circa 2007) have already enticed, ‘sold’, and damaged the former; and, the continuing inability of Seniors to sell their ‘free and clear’ homes, then retire to Sunbelt regions in newly bought manufactured homes, has stymied and discouraged the latter.

So, what’s an industry and its’ sister realty asset class to do? Well, that’s how we began, but detoured, last week’s blog post, with this slightly recast FOREWORD, describing the first of several ‘How to Save Our Industry?!’ measures to appear in coming weeks, to wit:

HOW do we move from entrenched GOLD RULE measures, described in previous paragraphs, to a bona fide Ethic of Reciprocity, a.k.a. the GOLDEN RULE? Well the process actually and quietly commenced 27 February 2008, at the first National State of the Asset Class (‘NSAC’) caucus, in Tampa, FL., when 100+/- landlease community owners/operators agreed on Five Action Areas to guide their future business dealings. One of those action areas encouraged landlease community owners/operators to effect…

Two years later, Randy Rowe, founder of Hometown America and Green Courte Partners, while a keynote speaker at the 19th annual International Networking Roundtable, in Phoenix, AZ., shared his ‘Five Part Market Share Recovery Plan for the Manufactured Housing Industry & the Landlease Community Real Estate Asset Class’. A key part of his plan further encouraged landlease community owner/operators to…

‘Ensure on – site sale PRICE and loan financing (TERMS) of new and resale homes, within landlease communities, is in sync with site – built housing offerings, and apartment RENTAL RATES, in the same local housing market.’ (Again, lightly edited for emphasis. GFA)

Have these two similar overtures been implemented among the estimated 50,000 landlease communities in the U.S. today? Unfortunately, for the most part, these interrelated $$$ matters remain, in this industry observer’s opinion, pretty much unchanged and unheeded, particularly among some larger property portfolios – though recent foreclosure actions, in some regions, appear to be forcing a degree of change.

The only positive advances worthy of mention here, have to do with two relatively new, but already popular resources, both researched and published in 2008, to facilitate the ideal and needed replacement of the GOLD RULE with the GOLDEN RULE!

• The booklet, HOUSING AFFORDOGRAPHY debuted in 2008. It’s purpose? To identify three empirical and one subjective measure(s) of ‘affordable housing & housing affordability’ – later supplemented with a fourth empirical measure.

• The same year, using one of the aforementioned measures (i.e. The 30% Housing Expense Factor or HEF), a new ‘Ah Ha!& Uh Oh! Worksheet’ was created to “…estimate maximum recommended ‘affordable’ & ‘risky’ purchase PRICES for new & resale, privately – owned homes of any type, sited on realty owned fee simple said home, or on a rental homesite within a landlease community.’

All that brings us to today, and the challenge contained in the title of this blog posting:

Let’s Replace the GOLD RULE with the GOLDEN RULE in 2012

Again, HOW? The most straight forward approach, to meet and implement this timely, reputation – enhancing, industry – saving challenge, is to couch the strategic procedure in terms of the well known 5 – Ps of MARAKETING, specifically:

Place. Ensure right location for a home sales center & that of the landlease community

People. Previous four marketing perspectives only as effective as sales and leasing staff!

So, how does one go about implementing the first three of these four Ps of Marketing?

PLACE. A subjective exercise at best. The key here, is to decide whether ‘home sales’ per se, are best achieved via an independent, standalone manufactured housing retail sales center located as near as possible, but separate from the host landlease community. Or, does said landlease community enjoy sufficiently good marketing and drive – by exposure, as well as easy highway access, to warrant simplifying staffing and inventory, by having MHRetail sales center on – site within property boundaries, with some ‘for sale’ homes installed, skirted, accessorized, and ‘ready for move – in’, or not. This particular P of Marketing does not lend itself directly to the proposed segue from the GOLD RULE to the GOLDEN RULE. That needed change begins with the next step…

Begin by ascertaining whether present or anticipated (i.e. in the event a new landlease community is being constructed, or an existing one is being acquired) landlease community operation is charging a rental homesite rate in sync with other forms of rental and fee simple housing in the same local housing market. How to do so? First, use the decades – old, but oft proven ‘3:1 Rule or Ratio’ for an initial ‘feel’ for the multifamily housing rental market. Perform the first of two Market Surveys; the first being of 3BR2B garden style, non – subsidized apartments or town houses. Calculate the average rent among these large units and divide by three. This pegs what the average landlease community site rent rate ‘might be’ in that local housing market. Then, effect a second Market Survey, this time of all comparable (by site count, amenities, etc.) landlease communities in the same local housing market – being sure to adjust for whether ‘water & sewer’ charges are included in or billed separately from said site rent. How does the average site rent compare to the result of the ‘3:1 Rule or Ratio’, and to the amount already being charged by the subject community? If this exercise is being effected pursuant to new construction, results suggest where initial site rent might be pegged.

Second step, relative to PRICE & PRODUCT, involves calculating the affordable ‘for sale’ amount of homes to be marketed in this particular local housing market. That’s where the aforementioned ‘Ah Ha! & Uh Oh! Worksheet’ comes into play. In this instance, all calculations begin with either the verified Annual Gross Income (‘AGI’) of a prospective homebuyer or household; and or, with the Area Median Income (‘AMI’) of the subject local housing market defined by postal zip code. For the purposes of this example, AMI is assumed to be $51,229.00 – which is the approximate national AMI for years 2010 & 2011. While the ‘Ah Ha! & Uh Oh! Worksheet’ is designed to produce four different maximum housing prices per local housing market; here, only one is being demonstrated, that of an ‘affordable’ home sited in a landlease community. Taking the $51,229 AMI; multiply it by 30 percent (.30) HEF, to estimate $15,368 available for a ‘loaded’ HEF – which is to say PITI (principal, interest, taxes & insurance escrows) AND annual household/utility expenses, not including telephone expenses, PLUS site rent. With that said, approximately 75 percent of that $15,368 will go to pay PITI and site rent. Divide $15,368 by 12 months, to show $961/00 month available to pay PITI & site rent. Then, subtracting the known or estimated site rent (see previous paragraph), of (for example) $333.00/month, $628.00 remains for PITI alone. Using a financial calculator, this $628.00 PITI payment, along with chattel mortgage terms of 9.5% for 20 years, suggests a maximum ‘affordable’ mortgage of $67,372.00. When a 10% ‘down payment’ is calculated back onto that figure, the maximum ‘affordable’ house price is $74,858, rounded to $75,000. maximum ‘for sale’ home price (i.e. ‘all in’, to include skirting, etc., to be included in mortgage) in a landlease community where site rent is $333.00/month.

So, where does this exercise in calculating ‘affordable’ PRICE & PRODUCT factors take us on this timely, image – enhancing, industry – saving journey from the GOLD RULE to the GOLDEN RULE? Simply put: Most independent, third party chattel lenders originating mortgages on manufactured homes going into, or already in, landlease communities, as well as landlease community owners/operators self – financing their own on – site deals, do NOT deduct ‘household/utility expenses, not including telephone expenses’ from the monthly amount calculated to be available for PITI and site rent. With that said, the ‘Ah Ha! & Uh Oh! Worksheet’, in yet another column, calculates, what it labels as ‘risky’ (vs. ‘affordable) maximum mortgage and home price amounts. Using the same starting point of $51,229, and ‘working thru the numbers’, but backing out the ‘household/utility expenses, not including telephone expenses’ 25 percent factor, and deducting $333.00/month site rent, leaves $948.00 for a ‘barebones’ PITI. Using a financial calculator, and the same chattel mortgage terms of 9.5% for 20 years, this suggests a maximum ‘risky’ mortgage of $101,702. When a 10% ‘down payment’ is calculated back onto that figure, the maximum ‘risky’ house price is $113,002, rounded to $113,000. in a landlease community where the site rent is $333.00/month. But remember, these new home purchasers/owners of ‘more home’ (i.e. $113,000 ‘risky’ vs. $75,000 ‘affordable’ transaction) will still be paying household/utility expenses each month, over and above the original 30 percent HEF cited at the beginning of this exercise!

This latter ‘risky’ approach to estimating maximum home price, in any given local housing market, is the manner in which many, if not most present day GOLD RULE deals occur throughout the manufactured housing industry and within landlease communities. If, as an industry and asset class, we truly want to segue into a more Ethical Reciprocity means of doing business, the GOLDEN RULE way, we’ll have to start selling ‘less house’ (i.e. What prospective homebuyers can purchase ‘affordably,’ and NOT in our heretofore ‘risky’ fashion), AND ensure our rental homesite rates truly in sync with other forms of multifamily rental housing and fee simple housing in the same local housing market.

Well, that gives you something sobering to think about during this next week. If you agree, even disagree, that we, as an industry and asset class should embark on this individual and collective business journey from allegiance to the GOLD RULE, to the Ethics Reciprocity GOLDEN RULE, talk to me about it – the sooner the better.

In the meantime, ponder this:

“To keep the Golden Rule we must put ourselves in other people’s places, but to do that consists in and depends upon picturing ourselves in their places. If we had the imagination to do that, there would be fewer families estranged by misunderstanding between the older and the younger generations, fewer bitter judgments would pass our lips, fewer racial, national and class prejudices would stain our lives.’ Harry Emerson Fosdic, D.D.

And in our case, maybe more new homes sold and more rental homesites leased!

Remember, the Manufactured Housing Institute (‘MHI’) will be having its’ annual Legislative Conference in Arlington, VA., 26 – 28 February 2012. This blog post is the sort of ‘timely, image – enhancing, industry – saving paradigm shift thought – and – actionable material’ our elected and salaried industry leaders should be discussing at these annual gatherings. If you’re an MHI member, like me, then let our leaders know what you think, about matters like this, and plan to attend. I plan to attend. Phone Lisa Brechtel @ (703) 558-0666 today to register!